Commodity Prices And Currency Movements

An Attractive Oil Play: CAD/JPY
Looking at this from a net oil exporter/importer perspective, the currency pair that tops the list of currencies to trade to express a view on oil prices is the Canadian dollar against the Japanese yen. Figure 2 illustrates the tight correlation between oil prices and CAD/JPY. More often than not, oil prices tend to be the leading indicator (as with USD/CAD) for CAD/JPY price action with a noticeable delay. As oil prices continued to fall during this period, CAD/JPY broke the 100 level to hit a low of 76.

Figure 2: A look at the correlation between the price of oil and the price action in the CAD/JPY from January 2005 to March 2009

Source: FXCM

Going for Gold
Gold traders may also be surprised to hear that trading the Australian dollar is just like trading gold in many ways. As the world's third-largest producer of gold, the Australian dollar had an 84% positive correlation with the precious metal between 1999 and 2008. Generally speaking, this means that when gold prices rise, the Australian dollar appreciates as well. The proximity of New Zealand to Australia makes Australia a preferred destination for exporting New Zealand goods. Therefore, the health of New Zealand's economy is closely tied to the health of the Australian economy, which explains why the NZD/USD and the AUD/USD have had a 96% positive correlation over the same time period. The correlation of the NZD/USD with gold is slightly less than that of the Australia dollar but is still strong at 78%.

Figure 3: A look at the correlation between the price of gold and the price action in the NZD/USD from January 2005 to March 2009

Source: FXCM

A weaker, but still important, correlation is that of gold prices and the Swiss franc. The country's political neutrality and the fact that its currency used to be backed by gold have made the franc the currency of choice in times of political uncertainty. From January 2006 until January 2009, USD/CHF and gold prices had a 77% positive correlation. However, the relationship broke down somewhat in September 2005 as the U.S. dollar decoupled from gold price movements.

Trading Currencies as a Supplement to Trading Oil or Gold
For seasoned commodity traders, it may also be worthwhile to look at trading currencies as an alternative or a supplement to trading commodities. In addition to being able to capitalize on a similar outlook (e.g. higher oil), traders may also be able to earn interest if they are on 2% margin or higher with most brokers. When trading currencies, you are dealing with countries, and countries have interest rates, of course. For example, a trader who may have bought the AUD/USD in March 2009 would be able to earn up to 3% in interest income if Australian interest rates remained at 3.25% and U.S. interest rates remained at 0.25% for the entire year. The 3% comes from taking Australia's central bank rate, which is the amount earned, and subtracting the nearly 0% rates paid for shorting the U.S. dollar. These are unleveraged rates, which mean that with 10 times leverage, for example, net of any exchange rate changes, the interest income would be that much higher. Leverage also makes the trade riskier, which means that if the trade turns against you, losses will be larger.
Along the same lines, if you shorted AUD/USD to express a short gold view, you would end up paying interest. If you're a commodity trader looking for a bit of a change from the usual pro gold trade (for example), commodity currencies such as the AUD/USD and NZD/USD provide good opportunities worth looking into.